The debate
relates to fundamental issues of economics and economic policy. It leads to what
policy framework a radical, anti-austerity party (or government) should adopt.
In the course of a constructive debate we should aim to arrive at some greater
clarity on this important issue.

The
debate

The original
SEB piece began with the argument that the main factor accounting for growth is
investment. This has long been the position in classical economics from Adam
Smith, who called it an ‘increase in stock’, to Marx, who used the term
‘development of the productive forces’. Keynes pointed out that the ‘General
Theory’ was primarily concerned with how to regulate the investment function in
order to achieve growth and prevent slumps*. Modern usage speaks of an ‘increase
in productive capacity’. However, the
logic of this classic position has now been demonstrated by the highest point of
modern econometric analysis, most especially through Vu Minh Khuong’s masterly
study The Dynamics of Economic Growth .

All output
requires inputs. Consumption is not an input and therefore cannot lead economic
growth. All economic activity depends first on production (of a good or
service).It is not possible to consume
that which does not already exist, either through nature’s abundance, or through
the production process.

The decisive
inputs for output are the level of fixed investment and the amount and quality
of labour. Vu Minh Khuong’s study shows that, taken together these account for
about 90% of all growth in the advanced industrialised countries, with fixed
investment playing the predominant role (57% of all growth in the advanced
economies).

Consumption
cannot logically be input to growth. Consumption takes place only after the
production process is complete, and is highly dependent for its own growth on
the growth of output. It has a dependent, subordinate role in relation to
output.

There are
also only two ultimate destinations for output. It can either be consumed or
invested. Since investment is the sole factor of these two which can raise the
level of output, it follows that the greater proportion of output devoted to
investment, the greater the potential growth of that output. The opposite also
applies. The greater proportion of output devoted to consumption, the lower the
potential growth of output. There is no such thing as ‘consumption-led growth’
(or its near cousin, ‘wage-led growth’ as wages too are a consequence of output,
and the struggle between classes over its distribution).

A farmer’s
crop in one year is ten bags of wheat. If she and her family consume all ten
bags, there is no seed to sow for next year’s harvest. If she retains two bags
to sow next year the crop will be the same. But if she can reserve 3 bags to so
next year the crop will be 50% bigger, all other things being equal. By
increasing the proportion of output devoted to investment, total output rises in
the following year and so can the level of consumption. The increasing
complexity of economic activity does not alter these fundamental relationships
between investment, growth in output and consumption.

This relates
to the debate on balancing the budget. If a radical, anti-austerity government
simply borrows or creates money to fund consumption, it will provide no boost to
long-term growth. This is merely a stimulus to spending or consumption. This may
be needed when consumption has fallen dramatically but cannot be a feature of a
medium-term economic policy. If on the
other hand, the same government borrows to invest in the productive capacity of
the economy then the economy is capable of sustainable expansion. This in turn can lead to economic growth and
the growth in consumption. Therefore such a government or economic policy
framework, which we can call Corbynomics, should aim at increasing the level of
borrowing for investment and aim at eliminating borrowing for consumption in
favour of borrowing for investment.

Unfortunately, the PRIME piece
does not deal with this substance of the original argument. Instead, there is
agreement that there is only consumption or investment, and no logically
separate category of ‘government’. It agrees on the need for public
investment.It also agrees that there
can be money creation to fund public spending.

But it is
hopelessly confused in treating the central argument. This is that there is only
consumption or investment, and of these two only the latter can contribute to
growth. Instead, it accuses the original piece of containing:

‘the
classical economists’ error of assuming there is a fixed amount of money which
if used for purpose (a) cannot be used for purpose (b)’.

This is false
and somewhat foolish. Consumption and investment are different functions.
‘Money’ or more accurately output, cannot be used for both functions
simultaneously.Money is a medium of
exchange used to purchase a good or service, and this can only be for
consumption or investment. (Money as capital can also be, and frequently is
hoarded. This is the situation currently and which is why the state must lead an
investment recovery.) Furthermore, the proportions between consumption and
investment are decisive for growth.

If Nominal
GDP (Y ) is 100, and Consumption(C) is
85 and Investment (I) is 15.

The ratio
between the two is approximately 5.5 : 1 (This is the position in the US economy
currently. In the British economy it is close to 6.5 : 1).

If Y remains
at 100 but C is increased to 90, then I must fall to 10. Contrary to the
assertion of the PRIME article the two must sum to 100. But the ratio between
them has adversely altered in terms of subsequent growth.

The PRIME
piece may be confused between proportions and levels. This is not clear but is
implied in the digression on the desirability of public services such as the
NHS, education and so on.Neither SEB
nor, more importantly, John McDonnell favours cuts to spending in these areas,
indeed both would seek to raise them. But the PRIME piece seems to suggest that
this is what is stake in the debate and this is a confusion of its own.

To clear up
this confusion: C cannot add to Y. This is because, if C = Y, then I must equal
zero. As a consequence Y cannot grow. Nor can C grow, because it is based on Y
and follows it. But if Y is 100 and C is 75 and I is 25, then the ratio between
the two changes from 4.5 or 5 to 3. And, all other things being equal the growth in Y will increase in following
years by approximately 2%, from which it would be possible to increase C and
I.

No-one in
this debate wants government spending on public goods and services to decline,
or the pay that is necessary to provide them nor the entitlements to social
protection. That is the austerity policy.

But it is
only possible to launch a sustainable increase in public services if there is
economic growth, and this depends on investment. The principal policy aim should
instead be aimed at driving up I at the optimal sustainable rate. This is the
main factor (along with improving the quality of labour via education and
training) which can lead to a rise in average living standards. Therefore the
requirement to increase I is the basis for all serious discussion on People’s
QE, government borrowing, taxation, wasteful spending such as Trident, and so
on. The determining role of investment
in creating growth and prosperity explains the role and importance of borrowing
to invest.

It is not
possible to shop your way to riches. Neither is it possible to borrow your way
to fund consumption. This is effectively what has been encouraged in the Western
economies over a prolonged period. It has led to economic slump and stagnation.

As for the
current budget deficit, this was £66 billion in 2014 while the revenue form
Corporation Tax was £42 billion. It would be possible, for example, to have a
graduated rise in this tax rate alone to halve the current budget, while still
leaving the rate below that of the US, Germany, Japan and other industrialised
countries.

But the main
driver of the decline in the current budget would be growth itself, which, as
the PRIME piece agrees, would generate tax revenues and lower government
outlays. The disagreement lies in identifying how that growth is to be
generated.

Thursday, 17 September 2015

One of the most widely repeated falsehoods about the British economy is the
assertion that it is growing strongly and that the crisis is over. This is not
borne out by even a perfunctory economic analysis but it serves a political
purpose. In the first instance the assertion was important in order to blunt any
criticism of renewed Tory austerity policies, which will begin again earnest
with the Comprehensive Spending Review in December. Now that Jeremy Corbyn has
won the leadership of the Labour Party the same falsehood is pressed into
slightly different service- with the idea that his policies represent a threat
to the current recovery, or are at least unnecessary.

In reality, the extremely limited upturn in output is already giving way to
renewed weakness. UK industrial production and manufacturing fell in July.
Monthly data can be erratic but this is the second consecutive fall for
industrial production and manufacturing peaked in March, shown in Fig. 1 below.

Fig.1 Industrial production and manufacturing index from April 2013 to July
2015

Source: ONS

This is not the boom that is repeatedly claimed. The recovery to date is
primarily based on consumption not investment. Since the beginning of the
recession to the 2nd quarter of 2015 consumption has risen by £70bn,
a modest rise of 5%. But investment has risen by just £4bn, a cumulative rise of
just 1.3% over 7 years, less than 0.2% annually.

In terms of output and investment, the notion of a boom amid austerity is
entirely misplaced. There is only stagnation. In fact, the levels of industrial
production and manufacturing are effectively unchanged since the Coalition took
office in May 2010, despite inheriting a mild recovery. In May 2010 the index
levels of industrial production and manufacturing were 100.2 and 97.6
respectively. In the most recent data they were 99.2 and 100.6. The trends in
output are shown in Fig.2 below. They clearly show that under austerity
production has stagnated.

Fig.2 Output trends from January 2008 to July 2015

Far from a boom the current economic situation is best characterised as
stagnation. In one form or another this also characterises the Western economies
as a whole. Since the recession began in the OECD as a whole, the average annual
level of GDP growth has been under 1%. Consumption has risen by US$2.5 trillion
over that time. But Gross Fixed Capital Formation has declined by $200bn over
the same period.

For the British economy, this continued reliance on consumption holds a
particular threat. The relative weakness of investment and hence the relative
weakness of productivity is a chronic one in Britain. The current crisis has
deepened these severe long-term problems. Output has fallen back to levels last
seen in the 1980s, as shown in Fig.3 below. This represents a combination of
both the long-term weakness of manufacturing and the decline in the output of
North sea oil, a financial windfall that has been almost entirely wasted.

Fig. 3 Industrial production over the long-term

As it is not possible to consume that which is not already in existence,
consumption must follow output. It cannot lead it. As the output of the British
economy is experiencing both a structural and a cyclical decline, its increased
consumption has been funded by its surplus on ‘financial services’, the money
British banks extort from the rest of the world, and on increasing indebtedness.

As the revenue from financial services has now also gone into decline, so the
resources for consuming without producing are increasingly through borrowing.
The broadest measure of Britain’s overseas borrowing requirement is the balance
on the current account. The current account includes both the trade balance and
the balance on all current payments , primarily company dividends and interest
payments by borrowers. Any deficit on the total current account must be met by
increased borrowing from overseas (or asset sales to overseas). The latest 3
quarters have seen the worst current account deficits as a proportion of GDP
since records began, as shown in Fig.4 below.

Fig.4 Current account blance as a proportion lof GDP

The financing of this deficit depends on the willingness of overseas
investors to buy UK assets. It is impossible to predict the precise point or
catalyst for them to stop doing so. But what is known is that the British
economy has faced a number ‘balance of payments’ crises before when the relative
level of overseas borrowing was far lower. One possible way of reducing the
current account deficit is to impose higher savings rates on the household
sector, raising the taxes and reducing the wlefare transfers to them from
government, which is one effect of renewed austerity. But even austerity Mark II
will be unable to close the current account gap of this magnitude entirely.

Therefore the British economy is facing a series of interrelated crises, of
production, slow growth and unsustainable borrowing. In reality they are key
products of a single crisis- the crisis of weak investment. Contrary to the Tory
propagandists, the supporters of austerity and their apologists, the crisis of
the British economy has not at all gone away. As a result Corbynonics, a
state-led increase in investment, is vital to end it.

Monday, 14 September 2015

By John Ross

John McDonnell, the new Shadow Chancellor, has created something of a stir by
his firm opposition to budget deficits to cover current expenditure – writing
‘let me make it absolutely clear that Labour under Jeremy Corbyn is committed to
eliminating the deficit and creating an economy in which we live within our
means.’ The so called ‘Keynesian’ left has attempted to make a point of
defending budget deficits, presenting this as a hallmark of the left. These
latter views are politically damaging because they are economically false.
Neither do they derive from Keynes but from the confused views of academic
pro-capitalist economics. John McDonnell is entirely correct on this point to
oppose borrowing to cover current expenditure over the course of the business
cycle.

The following article, originally published as ‘A damaging confusion in
Western economics books - which followers of Keynes and Marx should correct’
deals with this issue from a fundamental economic point of view. A more
comprehensive treatment of the issue, presented in a less technical fashion, can
be found in my article
‘Deng Xiaoping and John Maynard Keynes’.

Hopefully John McDonnell’s firm stance on the budget deficit will help the
left to adopt the positions of Keynes and Marx and abandon the confused ideas on
budget deficits that were wrongly presented under the name of ‘Keynesianism’.

* * *

Economics textbooks, particularly when discussing Keynes, frequently contain
an elementary economic confusion - it should be made explicit this is a
confusion in the textbooks and is not stated by Keynes. A typical example may be
taken as Mankiw’s Principles of Economics, but numerous other examples
could be cited as the confusion is widespread.1 This elementary
economic confusion is expressed in the following formula

Y = C + I + G + NX

In this widely used formulation Y = GDP, C is private consumption, I is
private investment, G is government spending, and NX is net exports. For a
closed economy, which can be considered here as trade is not relevant to the
issues analysed, this becomes.

Y = C + I + G

From this it is typically argued that if there is a shortfall in private
consumption C, private investment I, or both, then this can, or should, be
compensated for by an increase in government spending G. This allegedly
constitutes a ‘Keynesian’ policy. The fundamental confusion is that there exists
no category ‘government spending’ G which is neither consumption nor investment
– government spending is necessarily used for either investment or consumption.
In short the correct formula is expressed as

Y = Cp + Cg + Ip + Ig

Where Cp is private consumption, Cg is government
consumption, Ip is private investment and Ig is government
investment.

Keynes himself is clear on the distinction writing:
‘loan expenditure’ is a convenient expression for the net borrowing of public
authorities on all accounts, whether on capital account or to meet a budgetary
deficit. The one form of loan expenditure operates by increasing investment and
the other by increasing the propensity to consume.2

This formula clearly distinguishes Cg and Ig as
indicated above.

For Marxists it should be noted that this distinction is also made clear in
Marx’s categorisation of the economy into Department I (investment goods and
services) and Department II (consumption goods and services).

The attempt in economics textbooks to introduce a third category G which is
neither used for consumption nor investment is a piece of economic nonsense
which should be stopped.

A key reason the lack of clarity created by introducing the confused term G
is practically economically significant is the consequence for the structure of
the economy when is there is unspent private saving, including non-invested
company saving – i.e. private saving is not being transformed into private
investment, and the government steps in to maintain demand. There are then two
possibilities.

If non-invested private saving is used by the government for investment,
that is Ig increases, there is no change in the economy’s overall
level of investment – private investment is simply replaced by government
investment.

If, however, the non-invested private savings is instead used by the
government to fund consumption, that is Cg increases, then the
percentage of consumption in the economy rises and the percentage of investment
falls.

The use of an economically confused term G therefore obscures the choice
being made for the economy’s overall investment level by whether there is an
increase in government investment Ig or an increase in government
consumption Cg.

The practical significance of this confusion is that modern
econometrics shows that capital investment is the quantitatively most
important factor in economic growth. Therefore reducing the proportion of the
economy used for investment, other things being equal, will reduce the economic
growth rate.

Both economic economic theory and practical results show that in a capitalist
economy, not necessarily an economy such as China's, there is greater resistance
to government spending on investment than on consumption - as state investment
involves an incursion into the means of production, which in a capitalist
economy by definition must be predominantly privately owned. This theoretical
point is confirmed by the fact that state expenditure on consumption has
historically risen as a proportion of GDP in most capitalist economies since the
economic period following World War II while state expenditure on investment has
in general fallen in the same period.

The acceptance of government expansion of consumption, but opposition to
government investment, therefore has the consequence that when so called
‘Keynesian’ methods of running government budget deficits are used, and G rises,
what in practice happens is that Cg rises but Ig does not.
As the government is transferring non-invested private savings into consumption
such so called ‘Keynesian’ intervention therefore has the effect of reducing the
economy’s investment level – and therefore reducing the economic growth rate.
This process is concealed by using the confused term G instead of its proper
components Cg and Ig .

However, as already noted, it should be made clear that this confusion is in
textbooks and not in Keynes himself. But followers of Keynes should point out
this elementary and damaging confusion contained in many economic textbooks.
Notes
1. Mankiw, Principles of Economics 6th edition p562.

Wednesday, 2 September 2015

Words matter. But in economic discussion as elsewhere they are frequently
abused. In economic commentary one of the most frequent falsehoods is to
describe speculative activity as investment. Stock market ‘investors’ are in
fact engaged in speculative activity. There is no value created by this
speculation. The claim made by its apologists that it provides for the efficient
allocation of capital to productive enterprises is laughably untrue in light of
both recent events and long-run history. In fact, a vast
number of studies show that that there is an inverse correlation between the
growth rate of an economy and the returns to shareholders in stock market-listed
companies.

The chart below is just one example of these studies, Fig. 1. The research
from the London Business School and Credit Suisse shows the long-run
relationship between real stock market returns and per capital GDP growth. The
better the stock market performance, the worse the growth in real GDP per
capita. The two variables are inversely correlated.

The Economist found this result ‘puzzling’.
But it corresponds
to economic theory. The greater the proportion of capital that is diverted
towards speculation and away from productive investment, the slower the growth
rate will be, and the slower the growth in prosperity (per capita GDP).

Fig.1 Stock market returns and per capita GDP growth

This is exactly what has been happening in all the Western economies over a
prolonged period. SEB has previously identified a declining
proportion of Western firms’ profits devoted to investment. The uninvested
portion of this capital does not disappear. Instead, it is held as cash in banks
and the banks themselves use this to fund speculation and
share buybacks by companies (which simply omits the banks as intermediaries
in the speculation). The effects of this are so marked that some analysts
believe ‘financialisation’
is the cause of the current crisis, when instead it is an extreme symptom of the
decline in investment and the consequent growth of speculative activity.

Stock market crashes

It is now customary in the Western financial press to routinely ascribe all
aspects of the Great Stagnation to some failing in China. So, China’s fractional
currency devaluation has been identified as the culprit of the recent stock
market plunges, even though the 3% devaluation of the Chinese RMB followed a 55%
of the Japanese yen and a 27% decline in the Euro.

The claim that the crashes were caused by China’s currency move has no
factual basis. Fig.2 below shows the closing level of the main US stock market
index in August. The S&P 500 rose from 2,083 to 2,102 in the 4 days after
the RMB’s 3.2% devaluation which finished on August 13 (first arrow).

On August
19 the Federal Open Markets Committee (FOMC) of the US central bank released the
minutes of its most recent meeting (second arrow), which was widely interpreted
as indicating a strong likelihood that interest rates would be increased in
September. The prior closing level for the S&P500 was 2,097 and it fell
sharply thereafter. Following speeches by a number of governors of the US
Federal reserve (who vote on the FOMC) questioned the need for an increase in
rates, and the market has recovered in response. Yet other speeches pointing
once more to a rate rise led to stock market falls once more, and so on.

Fig.2 S&P500 Index

But this uncertainty over US rate increases is only the proximate cause of
the crashes. This sharp fall is a stock market verdict that it cannot easily
absorb higher US interest rates. The current valuations for the stock market are
based on official short-term interest rates of 0.25% and a dividend yield on
S&P500 stocks of 2.24%. Even if rates were only doubled to 0.5% the level of
the stock market becomes much less attactive. If rates were to rise towards 2%,
the risky stock market’s dividend yield looks extemely unattractive compared to
risk-free short-term interest rates.

There is a spearate matter that the US economy does not look robust enough to
absorb any significantly higher interest rates, but this hardly concerns stock
market speculators. Fig. 3 below shows the pace of growth in US industrial
production versus the same month a year ago. Production has slowed for a year
and is down to a snail’s pace in the last 3 months, averaging less than 1.4%
from the same period a year ago. The latest data show that the US economy is
experiencing only modest growth, with GDP in the 2nd quarter just
2.6% higher than a year ago.

Fig.3 Growth In US Industrial Production

Despite the widespread hype about the British economy, the equivalent data on
industrial production is growth of 1.5% for the latest 3 months compared to a
year ago. For the Eurozone it is 1.2%. In China, industrial production has grown
by 6.3% in the latest 3 months compared to the same period a year ago.

Corbynomics and crashes

Since 2010 the major central banks of the US, Japan, and the Eurozone have
created US$4.5 trillion, Yen 200 trillion and €1.1 trillion in their respective
Quantitative Easing programmes. The Bank of England has added £375bn of its own.
Over the same period short-term official interest rates have been at or close to
zero. Long-term interest rates have also plummeted. This has not led to a
revival of investment in the advanced industrialised economies. After the
short-lived stimulus in some Western economies to end the 2008-2009 slump, total
fixed investment (Gross Fixed Capital Formation) has slowed to a crawl in the
OECD as a whole, as shown in Fig.4 below.

Fig. 4 OECD GFCF, % change 1996 to 2013

Yet over the same period the main stock market indices in the OECD economies
have soared. The stock markets and real GDP are inversely correlated. The
S&P500 index has effectively doubled since 2011. The Eurofirst 300 has risen
by 55%, the Nikkei 225 in Japan has risen by 125% (boosted by currency
devaluation) and the FTSE100 has risen by 25% (a poorer performance held back by
the predominance of weak international oil and mining stocks). Data for 2014 is
not yet available but the total cumulative increased on OECD GFCF from 2011 may
not have reached 10%.

Corbynomics is the policy of attempting to address an investment crisis with
an increase in investment. Its critics repeatedly claim that this policy will cause
financial turmoil. In light of recent events this assertion ought to cause a
wry smile. At the very least, the most powerful central banks in the world have
to reassess their intentions on policy simply because of the wild gyrations in
the stock markets. These have been accompanied by further large movements in
global currency exchange rates.

The reason stock markets are so febrile, and policy so easily blown off
course is that a bubble is being created in financial assets because of the
combination of monetary creation, ultra-low interest rates and weak investment.
Capital that could be directed towards increasing the productive capacity of the
economy is instead being used to finance speculation; the worst of both worlds.
This policy has caused inflation in financial assets such stock markets, in
house prices and (previously) in commodities prices. But continued economic
stagnation means that deflation is now the greater risk in the OECD economies at
the level of consumer prices.

Corbynomics addresses those risks because its aim is to raise the level of
investment in the economy. By increasing the productive capacity of the economy
through investment-led growth it overcomes the weakness of the economy. By
redirecting the flow of capital from speculation towards investment, it deflates
the speculative bubble. So, to take an obvious example, by building new homes it
provides housing and employment while deflating the house price bubble.

The root of the objection to Corbynomics is the insistence that the private
sector, private capital must be allowed to dominate the economy in its own
interests. But the current Western economic model is a combination of shopping
and speculation, leading to stagnation. Corbynomics is the antidote to these;
prosperity through investment-led growth.

Tuesday, 1 September 2015

A great deal of highly inaccurate material is currently appearing in the Western media about the ‘crisis’ of China’s economy – an economy growing three times as fast as the US or Europe. This follows a long tradition of similarly inaccurate ‘crash’ material on China symbolised by Gordon Chang’s 2002 book ‘The Coming Collapse of China’.

The fundamental error of such analyses is that they do not understand why China has the world’s strongest macro-economic structure. This structure means that even if China encounters individual problems, such as the fluctuations in the share market or the current relative slowdown in industrial production, which are inevitable periodically, it possesses far stronger mechanisms to correct these than any Western economy. This article is adapted from one published in Chinese by the present author in Global Times analysing the greater strength of China’s macro-economic structure compared to either that of the West or the old ‘Soviet’ model. The original occasion of the article was the next steps in the development of China’s next 13th Five Year Plan. The analysis, however, equally explains the errors of material currently appear in the Western media.

* * *

In October a Plenary Session of China’s Communist Party (CPC) Central Committee will discuss China’s next five-year-plan. This provides a suitable opportunity to examine the reasons for China’s more rapid economic development than both the Western economies and the old Soviet system.

Taking first the facts which must be explained, China’s 37 years of ‘Reform and Opening Up’ since 1978 achieved the fastest improvement in living standards in a major country in human history. From 1978 to the latest available data real annual average inflation adjusted Chinese household consumption rose 7.7%. Annual average total consumption, including education and health, rose 8.0%. China’s average 9.8% economic growth was history’s most rapid.

As China’s ‘socialist market economy’ achieved this unmatched improvement in human living conditions it is this system which must be analysed. Its difference to both the Western and Soviet models explains why China’s economic development is more rapid than either.

China’s is a ‘socialist market economy’ – not a ‘market economy’ as is sometimes imprecisely stated utilising terminology which obscures the structural difference between China’s and Western economies.

The word ‘socialist’ derives from ‘socialised’ – large scale and socially interconnected. China’s economic structure differs from the Western in state ownership of China’s largest companies - those engaged in the most ‘socialised’ production. But simultaneously the largest part of China’s economy, as in every country, is not so large scale, socially interconnected - or state owned. China has billionaires and tens of millions of small and medium companies while China’s agriculture is based on small household farms. However the interrelation of China’s state and private companies fundamentally differs both from the West’s ‘mixed economy’ and the old Soviet system.

In a Western ‘mixed economy’ the private sector dominates. In contrast in China the CPC’s Central Committee in November 2013 explicitly reaffirmed: ‘We must unswervingly consolidate and develop the public economy, persist in the dominant position of public ownership, give full play to the leading role of the state-owned sector.’

But China’s economic structure also differs fundamentally from the old Soviet model in which the private sector was tiny – with even agriculture and local shops state run. Even in Marxist theory there was no justification for Soviet state ownership of small scale, that is non-socialised, companies and such ownership demotivated those working in them, crippling economic efficiency.

This different economic structure of China and the former USSR necessarily determines the different nature of their ‘five-year plans’. As the Soviet economy was essentially entirely state owned the state took even small economic decisions, setting tens of thousands of prices and outputs – it was an ‘administered’ economy.

The majority of China’s economy is not state owned, and China’s five-year plan sets only a few key macro-economic targets – overall growth rate, guidance on investment and consumption, industrial priorities etc. Within these parameters market mechanisms operate and are used to guide the economy. This is the precise sense in which Deng Xiaoping could state: ‘there is no fundamental contradiction between socialism and a market economy’ and ‘if we combine a planned economy with a market economy, we shall … speed up economic growth.’

But China’s macro-economic structure also explains its more rapid economic growth than the West, and avoidance of crises such as the post-2008 ‘Great Recession.’

Western dominance by private companies means no automatic mechanism ensures companies invest even when profitability is high. For example US company operating surpluses rose from 20% of its economy in 1980 to 26% in 2013, while simultaneously private fixed investment fell from 19% to 15%. As Larry Fink, the head of BlackRock, the world’s largest asset manager noted: ‘More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders . . . while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.’ The US government can appeal for greater private investment but it lacks any mechanism to enforce this. Such falling investment culminated in the US ‘Great Recession.’

Western economists such as Keynes foresaw such dangers, noting: ‘the duty of ordering the current volume of investment cannot safely be left in private hands’ and that it was instead necessary to aim at: ‘a socially controlled rate of investment.’ But the Western privately dominated economy has no mechanisms to control its investment level.

In contrast, if required, China’s state owned sector can be instructed to raise or lower investment. As the Wall Street Journal noted: ‘Most economies can pull two levers to bolster growth: fiscal and monetary. China has a third option. The National Development and Reform Commission can accelerate the flow of investment.’ China therefore possesses far stronger anti-crisis mechanisms than the West.

China’s five year plans, by setting certain key economic parameters but within these using market mechanisms, explains the superiority of China’s economy to both Soviet and Western systems – and therefore China’s economic outperformance of both.